National carrier Kenya Airways #ticker:KQ has obtained waivers from international lenders allowing the airline to breach liquidity ratios without suffering the penalty of having to repay debts worth Sh77 billion within one year.
Kenya Airways was forced by its auditors to restate its 2017 financials to reclassify the loans as “current” from “non-current”, which in accounting terms means that they are due for repayment within one year.
In an interview, the airline’s chief executive officer, Sebastian Mikosz, said the airline’s auditors, Deloitte, had demanded a restatement of its accounts after the airline failed to obtain waivers from its lenders by December 31, 2018. The restated results are carried in the national carrier’s 2018 annual report.
Previously, he said, auditors would accept post-dated waivers, but changed their stance this year citing adherence to accounting standards.
By the close of 2018, Kenya Airways which is known by its international code KQ, was not meeting the loan conditions and did not have the lenders’ waiver. The auditors had allowed the airline to present the bank waivers after December 31 and did not ask for a restatement, a process that has been recurring annually according to Mr Mikosz.
"This year, we asked the lenders to issue us the waiver saying they would not trigger the loan covenants, and they agreed, giving it to us in March," said Mr Mikosz.
"The auditors, however, insisted that the waiver had come after December 31, and that by the rules we needed to have had it before the close of the year and hence the restatement. We are repaying the loans as per the amortisation schedule."
The loans in question were taken from African Export-Import Bank (Afrexim), Citibank and JP Morgan for purchase of aircraft and funding of pre-delivery deposits for planes.
Under the terms of the loans, KQ was expected to maintain a pre-agreed level of unrestricted cash to revenue ratio, failure to which the lenders would have the right to call in their money within a year.
Without a waiver, this would leave the airline facing a huge headache of how to repay the Sh77 billion within 12 months, which considering its financial position would threaten the status of the airline as a going concern.
The airline’s short-term (current) debt, which in the original accounts had been stated as Sh7.1 billion as at December 31, 2017, was revised to Sh86 billion in the 2018 annual report. The airline, however, correctly classified the debt in its 2018 report, putting it at Sh77.36 billion.
Should KQ obtain its 2019 waivers before December, it will need a further restatement of accounts to reflect the loan shift back to non-current debt.
The reclassification of these loans is risky for the airline as it would likely spook other parties dealing with the airline due to concerns over the ability to pay off the money in 12 months.
In such a scenario, failure to repay would risk loss of aircraft to the international lenders who hold the titles to the planes as collateral.
"For the purpose of holding collateral for the financiers, the aircraft were registered in the name of special entities whose equity are held by the security trustees on behalf of the respective financers. The legal title is to be transferred to Kenya Airways once the loans are fully repaid," says KQ in its annual report.
The airline’s total debt stood at Sh82.3 billion by the end of last year, all of it denominated in dollars.
It owes Sh60.3 billion to Citi and JPMorgan, with the facility ideally maturing in 2026. KQ’s debt to Afreximbank stands at Sh17.45 billion, due to mature in 2025.
The airline also holds a Sh4.3 billion 10-year facility taken in 2017 from a consortium of local banks as part of the debt-to-equity restructuring under a government plan to save the airline.
The carrier continues to grapple with losses despite a raft of cost-cutting measures put in place to boost its bottom line, with debt servicing a key expense item.
In the year ended December 2018, KQ’s net loss deepened to Sh7.55 billion from Sh6.4 billion in 2017, marking a sixth straight year in the red for the airline.
Restatement of accounts is however not new for listed firms at the NSE.
An Auditor-General’s report released last year on energy parastatal Kenya Power indicated that the firm had failed to disclose its financial distress after it breached terms attached to Sh59.9 billion worth of commercial loans.
This should have seen the Sh49.9 billion out of the debt reclassified from long-term to short-term as of June had the firm not ignored accounting standard requirements.
The electricity distributor also irregularly recognised unbilled fuel costs as revenue in 2017, setting off a process that saw it manipulate the reporting of other items in its books in the quest to avoid disclosing lower earnings.
The decision to defer collection of fuel costs was meant to avoid a rise in power bills ahead of the 2017 General Election, which would have painted the government in bad light.